Our View:
The results of the much hyped Stress Tests on 19 troubled Banks declared after the NYSE closing on Thursday, is finally out. The announcement of results was delayed by a week to avoid a possible bloodbath at the stock exchanges. This after the results were modified once as the Fed backtracked on declaring the results on its earlier estimates of the Bank losses. Treasury Secretary Mr Geithner claimed grandiosely in a quick NYT op-ed "We chose a strategy to lift the fog of uncertainty over bank balance sheets and to help ensure that the major banks, individually and collectively, had the capital to continue lending even in a worse than expected recession. The effect of this capital assessment will be to help replace uncertainty with transparency," he said.
If what Mr Geithner said was true the exact amount of Toxic assets that healthy Banks were encouraged to swallow would have been laid bare. Transparency in Stress Tests required external auditing & demarcation of toxic assets. Both are missing.
In the case of Bank Of America which owes its misfortune due to the non-judicious purchase of Merrill Lynch and Countrywide in January both of whom were saddled with toxic assets, it was a case of bravado and wrong assessment by its CEO & Chairman . Lewis, who let down his shareholders was pilloried and voted out in April from the post of the Chairman of BOA by pension funds who have heavily invested in the Bank. Despite his public ouster as Chairman he tenaciously clung on to the post of CEO supported by the Fed & Treasury. It must be remembered that though Lewis had initially committed to buying the Toxic asset ridden Banks he moved ahead with the Merrill deal only after Federal Reserve Chairman Bernanke and former Treasury Secretary Hank Paulson rebuffed his effort to pull out of the transaction.
Whereas it would have been very much more transparent to declare the toxic assets of the two swallowed Banks and write them off over a 2 to 5 year time span, the Stress Tests did nothing of the sort. Instead as per the Federal Reserve the reason BOA is being told to increase the Capital by a whopping 35 Billion is to cover future operating losses. According to Fed’s Stress Test report the Bank of America may report $19.1 billion in losses from credit card loans in 2009 and 2010, or 23.5 percent of its total card lending.The bank may also post losses of $43.5 billion from home lending, including second liens that are tied to the value of homes. What about the losses from Merrill Lynch and Countrywide writeoffs.
There had been already doubt in the minds of investors and analysts about the rigors of the Stress Tests in absence of external auditing. The Stress Test was actually the Bank’s self assessment of its capital requirement during the 2009-2011 period and nothing to do with the health of the Bank Balance Sheets that are saddled with Toxic assets. With the toxic assets still hidden, the Stress Test results do not give any assurance to how much losses the Banks actually carry from the housing mortgage securities. If we add the future losses of credit card and housing loan in the 2009-2010 period that Fed wants to warn about , the implications are truly staggering.
No wonder the Economist suggested that the Stress Test results could be interpreted as the vindication of the Toxic Banks by an Administration too cozy with Wall Street during the boom, too soft on it in the bust.
The Economist and other analysts pinpoints the problem as the control of a big and influential lobby at the top of the heap including the top brasses at Banks, the Treasury & the Fed who over the past few decades nurtured the top 25 sub prime-mortgage originators, many with ties to big banks, and profited manifold from the losses that the tax payers and common stockholders are saddled with today. According to the Centre for Public Integrity a non-profit organization they have spent close to $380m on lobbying and campaign contributions over the past ten years. Also most of the Officials in the Fed and Treasury including members of the Governing Board have spent lot of time with Freddie and Fannie or the other Toxic Banks and would go no end to protect the securities mortgage racket and the people around it and if possible revive it at least to the extent of clearing their personal portfolios. No wonder when the stock markets moved upward last month it was the junk stocks that spurted first as people disposed of their problem assets with first flush of bailout funds that created artificial buoyancy at the NYSE.
However the Bailout funds will not last infinately. Nor will the Fed & Treasury
be able to push through more TARP funds to the beleagured Banks on a continued basis
So the Big banks have been advised to grow even bigger to help digest the toxic assets which were any way not being picked up by the market despite the Trillion Dollar TARP incentives. Thus greedy pythons like BOA who swallowed a sheep too many have been asked to bloat further, with public capital or Government funding. Will that stop the toxic indigestion , or will the churning continue internally and ultimately lead to the python bursting. Only time will tell.
In this blog from “ecology to economy” we deal with discussion of sustainable practices which we must adopt for climate change as well as other aspects of the economy. We are focusing in this issue on the Stress Tests of US Banks and the real implications it will have on the international economy.
We could be wrong. Tell us if we are & why? We encourage diverse opinion even if it is from commercially interested groups opposed to our thinking
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